U.S. Derivatives Regulator Proposes Rules for Customer Funds

“These are a series of strong reforms,” Commodity Futures Trading Commission Chairman Gary Gensler said in an interview at the Securities Industry and Financial Markets Association conference in New York. Photographer: Andrew Harrer/Bloomberg

Commodity Futures Trading Commission members voted 5-0 to
approve the proposals yesterday without a public meeting, CFTC
Chairman Gary Gensler said today at a Securities Industry and
Financial Markets Association conference in New York.

“This proposal is about ensuring customers have confidence
that the funds they post as margin or collateral are fully
segregated and protected,” Gensler said of the measures, which
will be open to public comment before they are completed.

The CFTC and National Futures Association, an industry
self-regulator, are bolstering oversight after Peregrine, a
commodities brokerage, collapsed in July with at least $200
million in client funds missing. MF Global, which filed the
eighth-largest U.S. bankruptcy last Oct. 31, is returning money
to customers who faced a $1.6 billion shortfall as part of the
firm’s liquidation.

The CFTC, Securities and Exchange Commission and Justice
Department have been investigating the collapse of MF Global,
and congressional investigators are preparing a report.

“I don’t think they substantially change what’s in
place,” James L. Koutoulas, chief executive officer of Typhon
Capital Management LLC and president of the Commodity Customer
Coalition, said of the proposals in a telephone interview.
“With laws, what is most important is enforcing them.”

The coalition has urged regulators to file civil and
criminal charges following MF Global’s collapse and to take
steps to improve customer protection.

Electronic Access

Under the CFTC proposal, regulators would have direct
electronic access to futures brokers’ bank accounts to monitor
customer funds. Russell Wasendorf Sr., founder and chief
executive officer of Peregrine, pleaded guilty in September to
forging statements from lenders “to embezzle millions of
dollars from customer accounts.” A month earlier he pleaded not
guilty to 31 counts of lying to U.S. regulators about the value
of customer funds held before the firm collapsed.

“If these new rules had been in place, we may not have
witnessed the Peregrine or MF Global debacles,” Bart Chilton,
one of three Democrats on the commission, said in an e-mail.

The proposals also would require heightened disclosure by
brokers about how client collateral is held at custodial banks
such as JPMorgan Chase & Co., State Street Corp. and Bank of New
York Mellon Corp. Standards for auditors of brokerages would
also be increased under the rule.

Liquidity Obligation

The proposal also calls for a new liquidity obligation for
brokerages in addition to existing capital requirements. The
requirement is intended to better detect distressed futures
brokerages that could put customer funds at risk.

“This ensures we have the ability to act in dire
circumstances to protect customer money,” Chilton said.

The proposal requires brokerages to back up segregated
customer accounts with funds to cover potential deficits.

Jill E. Sommers, one of two Republicans at the commission,
said she is particularly interested in public comments on that
aspect of the proposal.

“As always, I am sensitive to the fact that some
regulation, while well-intended, may not further its stated
goals or may be so burdensome that the benefits do not justify
the costs,” Sommers said in a statement.